In one of his most recent videos, cryptocurrency blogger Scott Cunningham made a fantastic presentation demonstrating why he considers BCH, LTC, and DASH to be the top three cryptocurrencies that could function as a form of digital cash. While Scott's video covered "real" coins with their own dedicated blockchains, I believe that stablecoin tokens (which run on top of existing blockchains) also have a key role to play in facilitating day to day purchases. In my post, I will discuss the top three stablecoins, the advantages they have over traditional cryptocurrencies for day-to-day transactions, some of the differences between them, and some considerations that may be important when deciding whether to use stablecoins or traditional cryptocurrencies as a payment mechanism.
What Makes a Good Daily Use Coin? (Pt 1. Stable Value)
As Scott pointed out in his video, any cryptocurrency that is used for day-to-day transactions should have a relatively stable price. If a cryptocurrency falls dramatically in price after you pay for something, then the merchant will feel like they sold the product for a steep discount. On the flip side, if the price of the cryptocurrency skyrockets after the purchase, then the buyer will feel that they have overpaid for the product.
If we look at data from CoinGeko we can see that each of the three cryptocurrencies Scott discusses (BCH, LTC, and DASH) have exhibited significant volatility and price swings in the past year. Simply by eyeballing the charts, we can see that DASH has ranged from about $47 to $148, Bitcoin Cash has ranged from about $149 to $605, and Litecoin has ranged from about $30 to $177.
I understand that 2020 has been quite a crazy year, and obviously, dramatic price appreciation is a good thing for cryptocurrency as an investment, but we have to remember that the main goal of a coin for daily transactions is to retain an approximately stable value.
In contrast to those cryptocurrencies, the top three stablecoins have generally stayed between $1.01 and $.98 throughout the course of the year. Dai experienced slightly more variation than the other two stablecoins (which we will discuss later), but overall they appear to do a much better job and have remained within 2% of the targeted value. Note: Although the fluctuations on Dai appear quite large, the scale on the Y-axis is in terms of cents whereas the scale for DASH is increments of $25.
Although each of the top three stable coins does approximately the same in terms of maintaining their dollar peg, the way that they maintain this peg varies considerably which could be one reason why someone would choose one coin over another.
For example, the USD (USDC) stablecoin is backed 1 to 1 by US dollars. In other words, for every USD stablecoin in existence, one US dollar should be sitting in a reserve account somewhere. Although Tether was originally believed to follow the same 1 to 1 system, it has a more relaxed definition of backing that the USD stablecoin and each Tether stablecoin is now backed by a combination of USD and “other” assets.
Herein lies a problem with centrally issued stablecoins. Although they do a very good job at maintaining the $1 USD peg, they rely on trust that the company will actually keep the required amount of dollars in reserve to back them. Trusting a centralized company runs counter to the principles of cryptocurrency, and for that reason, many people prefer a decentralized stablecoin instead.
In contrast to USDC and Tether which are issued by a centralized company, the Dai stablecoin is created and distributed by a decentralized network of participants interacting with smart contracts. I won’t cover all the details, but the general idea is that Dai is created when decentralized users lock cryptocurrency into a vault thereby minting new Dai. If the price of Dai starts drifting away from $1 USD, there is a market-based price inventive system that provides a financial incentive for users to mint more or less Dai and bring the price back to $1 USD.
In my opinion, Dai is more decentralized than either of the other two stable coins, but this decentralization and incentive-based price control also means that the price can drift a little bit further away from $1 than the other stablecoins. As with everything else in cryptocurrency, users have the choice of deciding what cryptocurrency they would prefer. Users who prefer more decentralization will usually opt for Dai, where is those that prefer a more precise peg to USD will likely opt for USDC or Tether.
What Makes a Good Daily Use Coin? (Pt 2. The Underlying Blockchain)
As I described in a previous article, stablecoins are actually a token which means that they don't have their own dedicated blockchain and instead run on a pre-existing blockchain. Thus, the stablecoin that a person chooses to use will depend and not just on the merits of the coin itself, but also on what blockchain they are wanting to interact with.
For example, Dai Is an ERC-20 token that runs on the Ethereum blockchain. This means that paying a merchant for a cup of coffee will require them to have an ERC-20 compatible wallet. It will also require the purchaser to spend a significant amount of gas required to pay the ETH transaction fee. The reason that Scott did not recommend traditional Bitcoin as a day-to-day payment mechanism was due to the high transaction fees, and I see ETH and ETH based stablecoins sharing a similar predicament.
If we are simply trying to make small, frequent purchases, then we need to use a cryptocurrency that has very low transaction fees. Although Dai is great at being decentralized and does a good job of maintaining its $1 USD peg, it doesn't seem very efficient to spend $3 to $4 in transaction fees to pay for a $4 coffee.
I believe that one advantage Tether (and USDC to a lesser extent) has over Dai is that it is capable of running on several different blockchains including EOS, Ethereum, Algorand, Tron, and most recently Bitcoin Cash.
I would make the case that it's important to consider not just the merits of the stablecoin itself and how it is backed, but how much it costs to transfer value using that stablecoin. In other words, the blockchain itself on which that stablecoin is transferred should be taken into consideration when selecting a stablecoin. For example, if I want to pay a merchant $5, I can do so with Dai on the Ethereum blockchain, which will likely take several dollars worth of fees in addition to the purchase price of the item. Or, I can send $5 worth of Tether on the Bitcoin Cash Blockchain which will add just a few fractions of a cent to my purchase price.
Further, operating on multiple blockchains allows a stablecoin to be more widely received. For example, Dai, which operates only on the Ethereum blockchain, can only be accepted by merchants with an ERC-20 compatible wallet whereas Tether could be accepted by anyone that has a Tron, Ethereum, BCH (with SLP support), Liquid Network, Algorand, Omin, or EOS compatible wallet.
Stablecoins Aren't Perfect
Although stablecoins do have many advantages over true cryptocurrencies, they aren't perfect, and I want to finish up by going back to Scott's video. Although DASH, LTC, and BCH might not be as good at maintaining a stable value, they offer much more decentralization than USDC or Tether are capable of offering. Although Dai is more decentralized than Tether or USDC, its transaction fees are currently very high which means that BCH, LTC, and DASH are more well suited to day-to-day transactions at least in that respect.
As with everything in crypto, there is a bit of balancing required, and everyone must make their own choices. Someone who prefers very high decentralization and a tight dollar peg might prefer to transact in Dai, but they would have to accept the high ETH gas fees. Someone that prefers a tight dollar peg and low fees might elect to use Tether on the BCH blockchain, but they would have to be content with trusting a corporation to be honest about its reserves. Someone that wants decentralization and low transaction fees might use BCH, LTC, or DASH as Scott suggested, but they would have to be comfortable with greater fluctuations in price.
Conclusion
My point in writing this article was to show that there are many great options in crypto, but, at least in my opinion, there is no ONE option that can do everything all at once. The coins that Scott suggested are a great starting point to consider, and although I would probably choose BCH (one of his choices as well) for the "best" daily use crypto there are many different coins/tokens which offer differing balances of speed, stable value, decentralization, and fees. Some people may find that they prefer the speed and decentralization of BCH/LTC/DASH whereas other people may be willing to give up a bit of decentralization or pay higher fees to have a more stable value coin. As always, it is up to each user to determine what balance is best for their specific purposes, and I believe there are a lot of "right" answers.
As always this is not financial advice.
Thanks for reading.
References
https://www.youtube.com/watch?v=vLTZKkcdlq8
https://www.coingecko.com/en/coins/dash
https://www.coingecko.com/en/coins/dai
https://www.publish0x.com/the-part-time-economist/multi-collateral-dai-starts-monday-heres-what-you-need-to-kn-xjyyvy?a=jneg2pDdwZ
https://www.publish0x.com/the-part-time-economist/cryptocurrency-tokens-vs-coins-crypto-whiteboard-101-xoldmwj?a=jneg2pDdwZ
https://www.publish0x.com/the-part-time-economist/the-stablecoin-solution-why-stablecoins-are-the-key-to-crypt-xxrxzj?a=jneg2pDdwZ
Image Credits
https://ethgasstation.info/
https://unsplash.com/photos/iar-afB0QQw
